With the advent of mass scale hybrid and electric cars and various other scientific developments in energy, we're living in what is probably the beginning of the end of the major age of oil. That being said, right now the stuff is still super important. I for one think we're going to see a rather violent shift in oil prices in the coming year. This obviously goes against a lot of what we're seeing in the news, but what can I say? I'm a over-confident 25 year old with an economics degree.
Don't get me wrong, it's pretty damn clear that oil prices are going to stay far lower than we're used to. Assuming refining doesn't cut too aggressively, we're really going to enjoy this at the pump. Here lies the first catalyst in what I think will be a drastic change in supply sooner rather than later.
1. If it's cheap, people will use it!
Since 2007 when we watched oil pricing get ridiculously out of hand, there has been a major shift in emphasis on fuel economy in transportation. Efficiency is the big word these days. I hate small cars, but even I've been looking at Jetta's just to get some gas mileage (I have a Tahoe). Suddenly though, I've been filling up my car for $1.95 a gallon and it doesn't matter as much to me. This mindset holds true for all. Supply and demand ladies and gents...increasing supply decreases prices which in turn increases demand. People really only care about fuel efficiency if it impacts their wallet. Auto sales tell the tale. SUV's and crossovers were 25% of sales for February while cars lost market share for the month. It's very clear that if people can afford it, they want SUV's. This in turn means more fuel consumption. That means more oil used.
It doesn't pertain to just cars. Any initiatives in solar and wind seem rather silly from a financial standpoint when fuel is so cheap. Because of the low prices in energy, I contend that we'll actually see a gross increase in fuel consumption until the supply is leveled off.
For those that contend we're pumping so much oil that we'll have a hard time burning the supply, I come to my next catalyst for a supply shift. Survival of the fittest.
2. Competition will kill production
They're already talking about it. Creditors like JPMorgan (NYSE:JPM) are having their stocks smacked in spite of solid earnings due to fear over debt default from energy companies. The part of this fear that I do see as warranted is that those that are in financial trouble, cannot stop producing. Where as the best move would be to cut production to stunt supply growth and in return reach profitable prices again, companies like Whiting Petroleum (NYSE:WLL) are desperate for cash. They aren't even pumping for profit, they're pumping to move cash and reduce losses. With this sort of activity going on, it's easy to think that supply can only get worse. That's where economics comes into play. If these companies keep over producing, the price will stay down and there will inevitably be defaults. As overstretched companies die, the stronger will benefit. Exxon Mobil (NYSE:XOM), BP p.l.c (NYSE:BP), etc. are likely to have the ability due to their size to better structure their businesses. There's a reason that Exxon's stock is relatively undamaged compared to others such as Pengrowth Petroleum (NYSE:PGH).
3. OPEC cannot keep it up forever
I give Saudi Arabia credit, they have successfully bombarded American competition. Of course it doesn't hurt when these royal families can afford to lose money on cheap oil whilst killing the balance sheets of American corporations. Not all producers have these luxuries however. OPEC and big non-OPEC players are holding a meeting on April 17 to discuss freezing future supply growth. While it makes sense that Iran doesn't want anything to do with this idea considering they've been sanctioned by the US for so long and need to recoup what I can only imagine have been some major losses, other large scale producers are desperate to lower the oil supply.
Nigeria has experienced massive turmoil economically from the fallout caused by oil's sharp price declines. Their oil minister, Emmanuel Ibe Kachikwu (I had a horrible time typing that) has stated that even if Iran opts out of a production freeze, he expects other members will agree on the idea. He also emphasized price stability as a key component. It's clear that even the world's oil cartel doesn't like the current market conditions, which certainly points speculation in an upward direction rather than further down. Furthermore, Nigeria actually needs more petroleum within their own country. So an increase for production for them would be refined there and never hit the world market.
On top of their suggested freeze, there are more consumers coming to the table. India is taking off economically. As a result, their oil demand is increasing drastically relative to other nations. This massive country represents a developing thirst that could very easily shift the tides of demand on a grand scale. Auto sales grew by 11% in February. As this new Indian consumer gets into the auto scene, petroleum demand will be a big deal.
Supply can't last
If we go back a few years, the biggest concern in global economics was how much longer oil reserves would last. In 2013 BP was saying 53 more years. Suddenly we've seen a massive shift to having too much oil on the market. However, this isn't due to there being more oil in the world, and rather because we've expedited the extraction of the commodity. I suggest we don't let this short term shift change our thinking. Oil is still arguably the most important commodity in the world. There is a finite amount of it, and we'll need it for quite some time. Even with shifts into clean energy, transitions are always chaotic and energy will no doubt be the same way. When you factor in the looming defaults of producers and the loosening resolve of OPEC to keep production down, there are less and less reasons to think oil will stay down. Buying into safe oil patches such as Exxon Mobil seems like a no brainer at this time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.